January Market Update from Geneva Financial

Since the Presidential election, mortgage rates have been on a mad dash upward; with no end in sight. In December, long term interest rates are at their highest level since May 2014, with the average 30-year fixed rate at 4.41%. That is an increase of almost 1% to interest rate.

HOME AFFORDABILITY TANKS

Affordability in the housing market declined to its lowest level since the fourth quarter of 2008, according to the latest Home Affordability Index from ATTOM Data Solutions, a fused property database.

In the fourth quarter, 29% of U.S. county housing markets were less affordable than their historic affordability averages, an increase from last quarter’s 24%, and more than double last year’s 13%. In fact, this increase marks the highest share of unaffordable markets since the third quarter of 2009, when 47% of markets were less affordable than their historic average.

Home prices increased once again in November by 6.8% as housing inventory dropped 8%, making affordability that much worse, according to the existing home sales report from the National Association of Realtors. (housingwire.com)

Home affordability is expected further deteriorate with interest rates climbing, substantially increasing the cost of a home that is purchased with a home loan.

THE FED RAISES RATES

In December, the Federal Reserve raised rates for the first time in a year. The federal funds rate was raised from 0.5% to 0.75%.

The Fed stated that this move to raise interest rates supports further strengthening of labor market conditions and a return to 2% inflation.

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year,” the statement said.

“Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft,” it continued. “Inflation has increased since earlier this year but is still below the Committee’s 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.” (housingwire.com)

This was the second federal funds rate increase since June 2006. While the rate increase has a direct impact on short term rates (i.e. credit cards, auto loans, etc.), the Fed sediment on further rate hikes, hinting up to three in 2017, sent long term rates soaring higher.

REFINANCE ENVY

Did you take advantage of historically low mortgage rates in the last couple of years? If so, pat yourself on the back, as those days are history for most. The opportunity to save a lot of money has likely passed you by.

Since Trump’s surprising win, long term interest rates, off sheer speculation have skyrocketed; up nearly 1% in a matter of weeks. Now 1% may not seem like a lot for many, it is a huge move in interest rate over a short period.

A report from Black Knight Financial Serviceslast week showed that the pool of borrowers who had incentive to refinance shrank over the last several weeks as interest rates rose above 4%. Now, thanks to another increase in interest rates last week, the pool of borrowers with incentive to refinance is now even smaller. As Freddie Mac noted in its most recent report, the average interest rate for a 30-year, fixed-rate mortgage increased to 4.13% for the week ending Dec. 8, 2016. That’s up from 4.08% during the previous week. Black Knight’s report last week showed that the number of potential refinance candidates dropped by more than 50% recent, as roughly 4.3 million borrowers were removed from the pool of potential refinance candidates.

Now, according to Black Knight’s newest report, another 700,000 borrowers lost the incentive to refinance with the latest interest rate increase.

Per Black Knight’s data, there are now 3.3 million borrowers in the eligible to refinance pool, which means that 5 million borrowers lost the incentive to refinance since the beginning of November when interest rates began to increase.

Note: Since Black Knight’s report, interest rates have continued to spike up, eliminating even more homeowners from being able to benefit from a refinance.

Eight years after the passage Housing and Economic Recovery Act of 2008 mandated that Fannie Maeand Freddie Macincrease lending to three specific “underserved” markets, the Federal Housing Finance Agency announced Tuesday that the government-sponsored enterprises must work to open the credit box for certain very low-, low-, and moderate-income families.

The requirement, called the “Duty to Serve” rule, stipulates that Fannie and Freddie must “provide leadership” to facilitate a secondary mortgage market for three specified “underserved” markets – manufactured housing, affordable housing preservation, and rural housing.

The GSEs are required to improve the “distribution and availability of mortgage financing in a safe and sound manner” for residential properties that serve very low-, low-, and moderate-income families in those three markets. (housingwire.com)

It is imperative that the GSEs “fulfill” their requirement in a “safe and sound manner.” Placing requirements to lend to underserved lower income areas can create looser lending guidelines, such as lower credit requirements and lower down payments. While home ownership may be the “American Dream,” not all are qualified to or responsible enough to experience that dream. A line needs to be drawn. The lower the lending requirements, the higher the risk of default, and the higher the risk to the GSEs (i.e. taxpayer).